So are we ready for the latest episode of the Reserve Bank's great juggling act?
That's right. It's that time again. The RBNZ is having its latest review of the Official Cash Rate on Wednesday, July 10. And again this will be the cue for our central bank to juggle with, on the one hand reassuring us it is on track to quell inflation, but on the other hand steadfastly refusing to give us any clues at to when the OCR may be cut. And this of course at a time when there is a growing clamour for lower interest rates.
The very easiest of things to forecast about the July 10 event is that the RBNZ will NOT be changing the OCR at the moment. That's a slam dunk.
The OCR will remain at 5.50%, where it has been since May 2023 - on hold following a super-aggressive round of hikes that brought it all the way up from just 0.25% as of the start of October 2021 to the aforementioned 5.5%.
The series of OCR hikes that we saw was the RBNZ's response to galloping inflation that charged all the way up to a peak of 7.3% in the middle of 2022. Remember, it's the RBNZ's job to keep inflation between 1% and 3%, with a specific target of 2%. That's the theory.
Well, inflation has now been outside of the 1% to 3% range for over three years. Which is a while. The most recent annual inflation figure as measured by the Consumers Price Index (CPI) was 4.0% as of the March quarter.
Somewhat frustratingly, the June quarter CPI figures - which will be so vitally important - are being released on July 17, exactly a week after the forthcoming OCR review. (I'll write a full preview of the CPI figures closer to the time.) However, as some indication of what we might expect inflation-wise, the fairly recently introduced monthly Selected Price Indexes, which account for around 45% of what's in the CPI, have been moving very much in the right direction, and food prices had their smallest increase in five years in the 12 months to May.
The RBNZ is forecasting that annual inflation as of June will have fallen to 3.6% and that it will further fall to 3.0% by the September 2024 quarter before ducking its head back under 3.0% (to 2.9%) in the December quarter. Based on those forecasts it will have taken three-and-a-half years to get inflation back into the 1%-3% zone.
However, the RBNZ won't be second-guessing inflation outcomes when its Monetary Policy Committee (MPC) makes its latest OCR decision on Wednesday. It will base the decision on known things. And based on what it knows right now, it won't be contemplating shifting the OCR. Not yet.
In fact, according to its most recent forecasts made in May, the RBNZ is not forecasting any reduction to the OCR till the second half of 2025, while it still sees about a 60% chance of actually raising the OCR again before the end of the year.
Do we really think the OCR might be raised again? No chance. But the RBNZ's keen to keep the ever-eager financial markets from driving down wholesale interest rates and prompting falls in mortgage interest rates. So, having the suggestion of a potential rate hike in the forecasts helps to keep the financial markets on their toes. There's a growing mood though that the RBNZ IS going to have to cut the OCR much sooner than it has indicated.
Since the RBNZ had its last OCR review on May 22 there has not been much key economic data released. But various more timely, second-tier, indicators have all moved pretty strongly in a direction that suggests two things:
•The economy's not exactly on its knees, but it's definitely getting into an uncomfortable crouching position.
•Inflation is on the run. (But is it running fast enough for the RBNZ?)
The biggest piece of economic data that has been released since the May 22 OCR decision was the March quarter GDP figure.
In the run-up to the March quarter figures, the economy went backwards for four quarters out of five (including back-to-back negative figures in September and December 2023 - a 'technical recession').
For the March 2024 quarter the economy managed growth of 0.2%, but nobody was getting particularly excited about this 'move out of recession'.
Economy slumps into reverse gear again
Economists are already forecasting that the economy will have gone back into reverse again in the just-finished June quarter. And in any case we need to very much bear in mind thatt GDP per capita shrank for the sixth consecutive time in the March quarter. The cumulative 4.3% contraction in per capita GDP during that time is more than we had in the aftermath of the Global Financial Crisis.
Other recent economic news has all been consistently downbeat. Retail spending is completely down in the dumps. The BNZ – BusinessNZ Performance of Services Index (PSI), recorded the lowest level of activity for a non-Covid lockdown month since the survey began. Kiwis' confidence in being able to get another job has plummeted. Company liquidations hit their highest level for a May month in 10 years. Both the ANZ Business Outlook Survey and the very long-running NZIER Quarterly Survey of Business Opinion painted a picture of dire economic activity and falling inflationary pressures.
I could go on, but I think you get the picture. It's dark for the economy - but inflation looks like it is in retreat. Which is what we need. But what we also need, or more to the point, what the RBNZ needs, is definitive proof.
Well, we might start to see that definitive proof as soon as July 17, but in the meantime the RBNZ will want to keep us 'on ice', telling us the pressure has to be kept on - and by implication interest rates have to stay up.
Back in April the RBNZ may have set a record for the most brief ever OCR statement, when it virtually said 'ditto' in what was clearly a deliberate (and successful) effort to leave well alone in terms of anything that might fire up market expectations. Move on. Nothing to see here. The RBNZ might just aspire to do similar (very brief) things with the forthcoming statement on July 10.
Ah, but those markets always have expectations. And the expectations have once again been centering on the RBNZ lowering that OCR much earlier than it has indicated it will. The wholesale interest rate markets are now actually pricing a better than 50% chance of the first cut coming in October. It won't. But you increasingly have to think it might come in November. A cut is more than fully priced by the markets for then.
Including the July 10 decision, the RBNZ has four more OCR reviews this year before the three month break till February 2025. These reviews are: July 10 as mentioned, August 14, October 9 and November 27. Two of the reviews - the August and November ones - are also accompanied by Monetary Policy Statements (MPS). That's an important thing to remember, because the RBNZ has a general preference for making the big decisions in tandem with the release of a new MPS. An MPS is generally about 60 pages, chock full of information, with all kinds of charts, graphs and special articles that can fully explain the RBNZ's current thinking; hence the reason it likes to make any significant change at a time when it has a new MPS coming out to explain the change in.
What that all means is that in terms of any significant shift in stance the RBNZ might contemplate before the end of this year, it's more likely to do that during either the August or November review. Or indeed maybe a bit in both.
The RBNZ should, but it won't
So, even though logic suggests the RBNZ should right now be dispelling any thoughts of another OCR hike and maybe suggesting that OCR cuts are in the pipeline, it won't. Not now. If there's to be a perceptible shift in stance then that is not likely to come till the August review at least - although it has to be said that the RBNZ has made something of a habit of trying to surprise the markets in the recent past.
All of which means that those among us who might be looking for clues from the July 10 OCR could well be disappointed. A change in tack is coming but the RBNZ doesn't want us to know about it till it's ready to do it. I leave you with two pithy summations. First from Westpac chief economist Kelly Eckhold:
"We don’t see any net dovish tilt [from the RBNZ] that might bring an easing in 2024 into play – if that’s coming it would be at the August Monetary Policy Statement."
And second, from Abhijit Surya, Australia and New Zealand Economist for global independent economic researchers Capital Economics:
"We expect the RBNZ to leave rates on hold for a seventh consecutive time at its meeting next Wednesday. To be sure, the Bank will probably strike a hawkish tone out of an abundance of caution. However, with the economy in tatters and inflation on its way back to the RBNZ’s 1-3% target, we still expect a pivot to policy easing by year-end."
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
37 Comments
We shouldn’t be paying Orr and his team big bucks to act on definitive proof. I can do that. We should be paying them to exercise judgement and imho they are well behind the 8-ball. Any cuts will have a 9-12 month lag just like hikes and how much needless damage will be inflicted in the economy by the end of this year?
Any cuts are not going to be overly material. Sure they’ll bring down the curve but nothing like 2009 through 2012.
The currency is the issue here. Orr is stuck between a rock and a hard place.
Its time to tighten the DTI already and prevent any unwanted house price growth (yes, it’s unwanted by the masses now).
RBNZ are determined to go down in history as the most determined of monetary policy zealots.
They will of course decide to continue to force the transfer of around $42bn a year from people and businesses with debts to:
- Savers ($26bn)
- Bank equity holders (parent banks) ($6bn)
- Bank running costs ($7bn)
- Govt ($3bn tax)
That transfer is 10% of our GDP, or about a quarter of total wages and salaries. Is it any wonder that workers are pushing for wage increases and businesses are holding prices up? We are in a cost of living crisis' and our central bank is making it much worse.
It's important to stress that our combination of high private debt and high central bank interest rate means that we are *leading the world* in the transfer of money from debtors to creditors. It's crazy.
Now, before anyone starts, I know we shouldn't have sent private debt to the moon between 1990 and 2009. But what's the plan here? Crash the economy for a year or so to get private debt down to 130% of GDP and house prices down another 10%... and then power the economy up by dropping rates, boosting private debt back to 150% of GDP, and sending house prices back up again? Then do we go through another cycle? I thought monetary policy was supposed to about acheving stability - not sending the economy into endless boom and bust cycles?
In my view this outcome was baked in back in 2020 (or even early say 2013 - 2019) when we decided to pump the housing market through foolish regulations across the board that lead to a euphoric boom in prices. Hence my repetitions on here about the path we were being lead down Including being gaslit by politicians saying that having expensive housing was a good problem to have - ‘a sign of our success’. Such a foolish (self centred and short term thinking) take on a serious issue.
We deserve whatever economic pain comes to us. Unfortunately it will be the poor and uninformed who likely suffer the most from it.
When you use monetary policy to create euphoric boom followed by euphoric boom, the consequence is a baked in crash.
It was in the good times that we needed to regulate with wisdom (because in the bad times you don’t have the choice of acting with wisdom, instead you suffer the consequences of your stupidity). For me it was the post GFC 2013 - 2019 period where we could have implemented regulations to prevent people from taking on too much debt relative to their incomes (eg restrictive DTIs, changing tax rules, limiting immigration). This would have stopped house prices rising too far and helped protect NZs financial and social stability if/when the next economic shock occurred.
Instead we’ve doubled down on everything that would make a crash worse if/when the economic shock were to happen.
It doesn’t need to be this way, but until we can get away from this parasitic mindset of debt speculation and using housing as a means of ‘wealth creation’ instead of a place to call home and raise children, then we are going to suffer poor financial and social stability outcomes.
My interpretation of your post above is that you think it must be possible to have euphoric booms without busts which it is not - so instead of talking about how interest rates are too high now (and the transfer of wealth to savers (who may yet now save the day by investing their savings in the coming bust), let’s talk about how we got ourselves into this financially precarious position in the first place (and learn from our mistakes! - but I’m doing so would require seeing the world through the lens of a doom gloom merchant, which in NZ means having a bad attitude!)
- Let’s have an restrictive immigration plan that is sustainable
- Let’s have a capital gains tax on investment property
- Let’s have high restrictive DTIs on property lending to prevent people holding excessive debt (risk) when the next recession arrives
- Let’s change the banking sectors risk weightings away from lending to property and towards other forms of productive business.
- Let’s create a culture that isn’t afraid of the future and their economic survival so that they don’t feel the need to gamble with debt and buy multiple rental properties (ie FOMO is a culture of people living in fear, it is the sign of a sick/mentally unwell culture/society). Instead a culture where you buy your own home, work your job, raise your family and pay off your mortgage (and don’t feel the urge to buy, 3,5..10 rentals which only makes our housing problems worse) - no FOMO! FOMO is our enemy as a society as it results in people making extremely poor financial decisions. If we have FOMO it means that our central bank and government have failed to create conditions of financial and social stability - ie they have failed in their obligated duties to society and their reason for existing. This is where we are at - failing government entities who cannot deliver upon what they are mandated to do.
Government = social stability
Treasury/RBNZ = financial stability
We have neither of the above. Ask around people you know - who feels financial and social secure in todays society? FOMO is a result of these government entity failures.
Agree with this, although you are misinterpreting my point if you think I believe continous euphoric booms are possible.
We can however return to a genuinely full employment economy with affordable housing, decent public services, a regenerating ecosystem, and happy young people that see a future in NZ. The trouble is that we will not achieve those goals with an open, free-market, rentier economy that obsesses over short-term GDP / profit goals. We need to keep money moving around the economy, prevent over-accumulation of wealth (inc across generations), balance our trade deficit, stampdown on destabilising speculation, achieve energy sovereignty etc. We can't achieve those goals with the current economic model.
Take the obsession with GDP. What is it? The dominant measure GDP(P) is basically a measure of financial surplus; the difference between operating costs and sales. We can only have an ongoing increase in that surplus (GDP growth) if Govt deficit spending + private debt increases go up by more than onshore and offshore savings. Look where that is taking us now that the cost of imported stuff has gone up!
So, I am with you on the doom and gloom, but perhaps for different reasons.
‘We can however return to a genuinely full employment economy with affordable housing, decent public services, a regenerating ecosystem, and happy young people that see a future in NZ’
JFoe - could you please bullet point your plan for our path to prosperity based upon this vision? ie what do we need to do in terms of policy/regulation to make this a reality.
And how does cutting interest rates now led to it? That is what I don't understand. I agree with a huge amount of what JFoe says but I can't understand how "cut interest rates ahead of the Fed" ends up as the conclusion here.
As you've said I_O we have had the speculative boom, now we are experiencing the speculative bust. They are a package deal which is why they should be avoided in the first place. I really empathise with people who are getting stung by this especially younger buyers. I have friends who bought at the literal peak because they aren't very financially engaged, wanted a home for them and their family, and were scared they'd be locked out permanently. And now prices have massively declined in their area while payments have increased a lot. And all they wanted was a home of their own (and it is a modest one, let me assure anyone reading). But cutting interest rates now is no real solution especially if it (temporarily) lifts the pressure to solve the fundamental issues that got us into this spot in the first place.
An interesting chart but out of context doesn't say too much. Where did you get it btw? I'd be curious to see a similar chart showing Public debt as well as a chart showing movements of major currencies against the USD since, say, 2021.
> I thought monetary policy was supposed to about acheving stability - not sending the economy into endless boom and bust cycles?
I think everyone agrees we are not in a good situation but going from that to "cutting interest rates" is a big leap. Especially as we'd be frontrunning the Federal Reserve which would have a lot of impact. We could (maybe) get away with a 0.25 or maybe 0.5 cut even if the Fed hasn't budged but anything more than that and we'd be looking at a whole different set of problems.
Saying "we need stability, not endless booms and busts" at this point in the cycle is like saying I'm not so sure about going down after having ridden the rollercoaster up....We are in for the full ride at this point. The real question is will we actually change things or just hop back on the ride again.
Here you go. They make up about 20% of GDP(P) if you include wholesale. Remember that GDP is basically a measure of surplus generated (sales minus costs), so obviously, in NZ, finance, insurance and real estate (FIRE) outgun construction, retail, hospo and construction combined!
If you look at operating income (sales) our retail, wholesale, hospo, and construction sectors make up almost exactly half of the total.
This Housing market crash is a great opportunity.
From Peak NZ housing Ponzi prices......
It's now down on REAL terms by between -40 and -50% in Auck and Wgtn and other large cities, with another -10 to -20% bleed to occur.
Buyers today, should seek big discounts off the asking prices, or walk. The negative equity land is a very Mentally upsetting one, to be in.
The regions will soon catchup with these beautifull "Negative Growth - " Housing numbers. It's a dead cert.
So the RBNZ has the tools now and should continue to chase these Housing Prices down, with a sinking lid DTI.
They should drop it NOW to a 5x DTI FOR EVERYONE. No special favours for the Landlording class.
Then they should drop it to 3.5 or 4x DTI at the bottom of this Crash, in 2027 2028.
Then and only then, should small OCR cuts occur, with retail interest rates falling to around 5% again.
Uber Cheap DEBT has had disasterious social consequences in NZ.
#NEVERAGAIN#
JUST HIGHER INTEREST RATES will be a global phenomenon anyway, given Deglobalisation and ongoing / decade of wars ahead of us.
‘If you’re forced to sell, you’re screwed’ - mortgagee sales expected to rise
The broker said banks were going out of their way to help people struggling financially but when mortgage holidays and interest only options were exhausted the real problems would start.
“I personally think anyone looking at buying a house should wait six months to 18 months. You'll probably be able to get a steal because people will be desperate.”
FECKING ONEROOF!!
The temerity of these Oneroof scrotes !
Those absolute MxxxxxFxxxers and their Writers, were totally complicit in pumping the NZ housing Ponzi to the MAX. They then pumped it higher.
THEN, they went into overdrive, with the countless articles about: "36 million reasons, house prices won't come down"
Now the "Baked in crash" is confirmed as the case and only midway........
That lot should be publicly outed as: PONZI SCHEME PROMOTERS. THEN LEGALLY FLOGGED!
Where the hell is the FMA on this??.
Re the Irish crash
Role of the media
Throughout the bubble, newspapers and media played a vital role in hyping property. No national newspaper was without a glossy property supplement and weekend papers were often equally filled with property ads, reviews of new developments, stories of successful purchases, makeovers, and a gamut of columnists relating their property experiences. TV and radio schedules were filled with further property porn - house-hunting programs and house makeover programs were regular features on every channel. Even in July 2007, Irish Independent journalist/comedian Brendan O'Connor urged people to buy property, even as the bubble was clearly bursting.[42] In April 2011, journalist Vincent Browne admitted that the Irish media had played an important role in adding to the frenzy of the Irish property bubble.[43]
OneWoof, The Comb, Ashley etc etc etc
Surely deep down some of the people writing these articles must have known they were potentially misleading a lot of people about the risks?
The quote from the bible comes to mind on living with integrity - ‘for what shall it profit a man to gain the whole world but lose his own soul?’
How people are happy to get paid to promote a potentially extremely damaging housing bubble on the way up is (and was at the time) completely lost on me.
Your "real" figures are nonsense, NZGecko.
The truth is that NZ's median house price (nominal) has risen 60-70% over the last 8 years. (This was detailed in a recent article www.interest.)
Furthermore, rents have increased considerably through this period - so yields have been strong.
TTP
Hey TTP,
That's from peak NZ Housing Ponzi REAL prices bud.
But you go screw the Stats, over longer Timeframes (typical Tony A and Ashley tactic) to suit your PBrokers "discussion points" used to condition the housing market vendors/buyers.
TTP, how many of your recent buyers are now near morgagee sales?? After your "buynow, bee quick" advice?
I trust you are stepping up and supporting them financially and mentally?
Prices are not down at all in ChCh!
slower and fewer buyers, but that is not due to lack of demand, loan servicing!
Nothing surer is that if ever a CGT was introduced would ensure prices increased, just like everywhere that has a CGT.
Ozzie prices are higher due to taxes and CGT,
On one hand the RB will release another staunch statement this week. On the other hand they'll be eagerly anticipating the Q2 numbers on July 17. They'll be wanting to know to what degree the economy has deteriorated since March.
They'll know as well as we do that there's been significant change. And that it's likely to continue in Q3.
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